“Using Aftermarket Power to Soften Foremarket Competition” by Yuk-fai FONG
This paper studies competition among equipment sellers who each monopolize their equipment’s aftermarket. However, their aftermarket power is contested by foremarket competition as equipment owners view new equipment as a substitute for their incumbent firm’s aftermarket product. I show that such constrained aftermarket power allows a larger number of firms to sustain the monopoly profits. More strikingly, as long as existing customers have a shorter market life expectancy than incoming customers, for any discount factor, supranormal profits are sustainable among arbitrarily many firms each selling ex ante identical products. Ironically, if the aftermarket is isolated from foremarket competition, then aftermarket power no longer facilitates tacit collusion, suggesting the importance of distinguishing between two types of aftermarket power which are often considered to be qualitatively the same.